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Recently， there were numer- ous reports about the application for bankruptcy of Detroit， Michigan. Actually， the bankruptcy of Detroit did not happen overnight. The signs could be seen a long time age. It is actually a necessary result of the economy of U.S. adjustment and an incremental problem.
The United States has the largest number of running cars in the world. This country has 300 million cars and more than 280 million vehicles are running on its road. Therefore， it is called the “Country on the Wheel”. The auto industry in this country is very developed as well， since it had been the country with the largest production and consumption of automobiles in the world for many years. This title was just taken away by China in 2010.
The three auto-making companies， General Motors， Ford and Chrysler， are all headquartered in Detroit. Once upon a time， Detroit was a beautiful and prosperous city. It was once the fourth largest city in the United States and the most centralized place for auto-making industry. At that time， when people spoke of cars， they would subconsciously talk about Detroit. The yearly Detroit Auto Show also foretold the new changes and trends of the global auto industry.
However， the glory has been gone and now Detroit is a city with a smaller population， dull atmosphere and dim outlook.
It is reported that Detroit has had the debt of over US$18 billion， including the US$9.2-billion gap in pension funds and medical care. The outward migration and the recession of auto industry explained the fall of Detroit.
Detroit’s fall has raised the warning for many Chinese cities， since its bankruptcy is closely related with the auto industry. Anyone knowing about the story of Detroit would say that Detroit was too dependent on the single industry – the auto industry.
Looking at China， it seems that some cities need to learn a lesson from the fall of Detroit. In the past few years， several resource-based cities were reported with running low of their resources and getting into the trouble of development. However， some cities have already made preparation for this change. Daqing， a famous city with petroleum， has already introduced some auto manufacturing business before running out the oil resources.
Therefore， it is not likely that the case of Detroit would rise in China because of the excessive independence on one industry. However， that does not mean China is immune to the concerns about falling local governments. Since the huge debts， which directly killed Detroit， are a haunting problem for several Chinese cities. As of August 1， 2013， China fully started the audit of local governmental debts in the whole country. This was the second time that the audit department of central government made a comprehensive review of local governments.
The review revealed that nine of the capital cities have the debt ratio of over 100%， which means that their assets cannot offset their debts. If not handled well， these cities might meet the same fate as Detroit.
The State Administration of Audit of China published the results of reviewing 36 local governments’ debt on August 6. An insider from this department said that “there were four provinces and eight capital cities having the local governmental debts increase by over 20% yearly. There are nine capital cities whose asset-debt ratio is higher than 100% with the maximal ratio of 189%”.
However， he did not reveal which nine cities are facing the danger of becoming China’s Detroit.
Tiger Finance， a private financial research organization， made an estimation of the debts of different local governments in China and dared to post a possible list of the nine cities， which are， from high to low， Nanjing， Chengdu， Guangzhou， Hefei， Kunming， Changsha， Wuhan， Harbin and Xi’an.
A source from Tiger Finance said that the list was gained by combining the published debts and financial information of each capital city in China. Concretely， they divide the financial income of each capital city with the debts they raised through public fundraising platforms.
It is not known whether Tiger Finance has taken the right way or not. But it is an undeniable truth that the lo- cal governmental debts have become a great problem for China.
Recently， Reuters published an article named “Jiangsu Trapped in the Nightmare of Debts？”， showing that Jiangsu， which is haunted by a large amount of debts， is going through a tough time. It quoted the data from Shenzhen-based Yanglee Trust， saying that the local governments of different levels in Jiangsu took 30% of the trust funds sold in China in 2012. Wuxi， a city of Jiangsu， raised RMB 9.2 billion through the trust funds. This city’s government promised the 10% investment return for the trust investors， much higher than the 6% interest rate of the banking loans. In addition， the Jiangsu provincial government sold the bonds valuing RMB 343 billion in 2012， three times as large as the figure in Guangdong.
Reuters did not say that Wuxi， or any other city in Jiangsu， would become the Detroit of China. But it indeed reminded the Chinese government， as many other media and experts did， that the incremental local governmental debts will finally bring devastating influence to the Chinese economy. This April， the international ratings agency Fitch’s dropped the long-term credit rating of China’s domestic currency from AA- to A+， allegedly due to the concerns of increasing local governmental debts and the shadow bank. From then on， the local governments have become a problem for the Chinese central government.
On August 1， Wang Yiming， Deputy Director of the Macroeconomic Research Institute at the National Development and Reform Commission， disclosed a few details about the audit of local governmental debts of this time.
“Many local governments’ debts have the problems of short-term repayment of capital and the mismatch issues. They could be called ‘financial predicament’ instead of ‘disaster’. Therefore， it is not likely for a Chinese city to go through the fate of Detroit in a short while，” said Wang Yiming.
However， he admitted that the problem of local governmental debts need to be solved as soon as possible.“The long-term investment into， for example， infrastructural facilities， is needed. The best way to raise funds is not to borrow from the banks， but to issue the governmental bonds， which are more transparent and easier to track.”
He also warned that it was not a completely good thing that a local government could not go bankrupt. This is because any cracks in the local governmental debts will trigger the influence that will not be stopped at the local government – because it will not be bankrupt to liquidate any debts – and will spread to the whole country. That further requires the central government of China to focus on the problem of local governmental debts.
“The new Chinese government has been in position for less than one year. So it is unlikely to stop the construction of big projects in different places，” said a source close to the State Administration of Audit. “The only method right now is to stop the further expansion of the debts.”
“The audit of local governmental debts will not have significant negative influence over the investment into the infrastructural facilities，” said Liu Qiyuan， an analyst at Qilu Securities. “After all， to stabilize the economic growth rate has been established as the dominant rule of the economic policies of Premier Li Keqiang， which are termed as Likonomics.”
“Presently， the economic policies are going through some tiny changes to keep the stable economic development. The main methods include the promotion of the investment into railway， the reconstruction of slums and the invest- ment into the small- and medium-sized enterprises. The audit of this time is not a hindrance for the investment in some specific fields and tallies with the central government’s will of pressing the local governmental debts，” Liu added.
On July 4， the Ministry of Finance published the Experimental Methods for Local Governments to Issue Bonds in 2013， allowing Shandong and Jiangsu Provinces to join the ranks of Shanghai， Zhejiang， Guangdong and Shenzhen which have the permission of issuing governmental bonds.
This is for the sake of improving the structural transparency of local governmental debts， which is considered to be a problem as serious as the amount of debts.
A professor from Tsinghua University said that this might find a direction for the reform to local governmental debts.
“The audit ould get to know the source of local governmental debts. The new file would put forward a better way to the governments to raise investment，” the professor said. “A transparent system of local debts is as important as the solution to the debt problem， since it could prevent the case of Detroit from happening in China forever.”
The United States has the largest number of running cars in the world. This country has 300 million cars and more than 280 million vehicles are running on its road. Therefore， it is called the “Country on the Wheel”. The auto industry in this country is very developed as well， since it had been the country with the largest production and consumption of automobiles in the world for many years. This title was just taken away by China in 2010.
The three auto-making companies， General Motors， Ford and Chrysler， are all headquartered in Detroit. Once upon a time， Detroit was a beautiful and prosperous city. It was once the fourth largest city in the United States and the most centralized place for auto-making industry. At that time， when people spoke of cars， they would subconsciously talk about Detroit. The yearly Detroit Auto Show also foretold the new changes and trends of the global auto industry.
However， the glory has been gone and now Detroit is a city with a smaller population， dull atmosphere and dim outlook.
It is reported that Detroit has had the debt of over US$18 billion， including the US$9.2-billion gap in pension funds and medical care. The outward migration and the recession of auto industry explained the fall of Detroit.
Detroit’s fall has raised the warning for many Chinese cities， since its bankruptcy is closely related with the auto industry. Anyone knowing about the story of Detroit would say that Detroit was too dependent on the single industry – the auto industry.
Looking at China， it seems that some cities need to learn a lesson from the fall of Detroit. In the past few years， several resource-based cities were reported with running low of their resources and getting into the trouble of development. However， some cities have already made preparation for this change. Daqing， a famous city with petroleum， has already introduced some auto manufacturing business before running out the oil resources.
Therefore， it is not likely that the case of Detroit would rise in China because of the excessive independence on one industry. However， that does not mean China is immune to the concerns about falling local governments. Since the huge debts， which directly killed Detroit， are a haunting problem for several Chinese cities. As of August 1， 2013， China fully started the audit of local governmental debts in the whole country. This was the second time that the audit department of central government made a comprehensive review of local governments.
The review revealed that nine of the capital cities have the debt ratio of over 100%， which means that their assets cannot offset their debts. If not handled well， these cities might meet the same fate as Detroit.
The State Administration of Audit of China published the results of reviewing 36 local governments’ debt on August 6. An insider from this department said that “there were four provinces and eight capital cities having the local governmental debts increase by over 20% yearly. There are nine capital cities whose asset-debt ratio is higher than 100% with the maximal ratio of 189%”.
However， he did not reveal which nine cities are facing the danger of becoming China’s Detroit.
Tiger Finance， a private financial research organization， made an estimation of the debts of different local governments in China and dared to post a possible list of the nine cities， which are， from high to low， Nanjing， Chengdu， Guangzhou， Hefei， Kunming， Changsha， Wuhan， Harbin and Xi’an.
A source from Tiger Finance said that the list was gained by combining the published debts and financial information of each capital city in China. Concretely， they divide the financial income of each capital city with the debts they raised through public fundraising platforms.
It is not known whether Tiger Finance has taken the right way or not. But it is an undeniable truth that the lo- cal governmental debts have become a great problem for China.
Recently， Reuters published an article named “Jiangsu Trapped in the Nightmare of Debts？”， showing that Jiangsu， which is haunted by a large amount of debts， is going through a tough time. It quoted the data from Shenzhen-based Yanglee Trust， saying that the local governments of different levels in Jiangsu took 30% of the trust funds sold in China in 2012. Wuxi， a city of Jiangsu， raised RMB 9.2 billion through the trust funds. This city’s government promised the 10% investment return for the trust investors， much higher than the 6% interest rate of the banking loans. In addition， the Jiangsu provincial government sold the bonds valuing RMB 343 billion in 2012， three times as large as the figure in Guangdong.
Reuters did not say that Wuxi， or any other city in Jiangsu， would become the Detroit of China. But it indeed reminded the Chinese government， as many other media and experts did， that the incremental local governmental debts will finally bring devastating influence to the Chinese economy. This April， the international ratings agency Fitch’s dropped the long-term credit rating of China’s domestic currency from AA- to A+， allegedly due to the concerns of increasing local governmental debts and the shadow bank. From then on， the local governments have become a problem for the Chinese central government.
On August 1， Wang Yiming， Deputy Director of the Macroeconomic Research Institute at the National Development and Reform Commission， disclosed a few details about the audit of local governmental debts of this time.
“Many local governments’ debts have the problems of short-term repayment of capital and the mismatch issues. They could be called ‘financial predicament’ instead of ‘disaster’. Therefore， it is not likely for a Chinese city to go through the fate of Detroit in a short while，” said Wang Yiming.
However， he admitted that the problem of local governmental debts need to be solved as soon as possible.“The long-term investment into， for example， infrastructural facilities， is needed. The best way to raise funds is not to borrow from the banks， but to issue the governmental bonds， which are more transparent and easier to track.”
He also warned that it was not a completely good thing that a local government could not go bankrupt. This is because any cracks in the local governmental debts will trigger the influence that will not be stopped at the local government – because it will not be bankrupt to liquidate any debts – and will spread to the whole country. That further requires the central government of China to focus on the problem of local governmental debts.
“The new Chinese government has been in position for less than one year. So it is unlikely to stop the construction of big projects in different places，” said a source close to the State Administration of Audit. “The only method right now is to stop the further expansion of the debts.”
“The audit of local governmental debts will not have significant negative influence over the investment into the infrastructural facilities，” said Liu Qiyuan， an analyst at Qilu Securities. “After all， to stabilize the economic growth rate has been established as the dominant rule of the economic policies of Premier Li Keqiang， which are termed as Likonomics.”
“Presently， the economic policies are going through some tiny changes to keep the stable economic development. The main methods include the promotion of the investment into railway， the reconstruction of slums and the invest- ment into the small- and medium-sized enterprises. The audit of this time is not a hindrance for the investment in some specific fields and tallies with the central government’s will of pressing the local governmental debts，” Liu added.
On July 4， the Ministry of Finance published the Experimental Methods for Local Governments to Issue Bonds in 2013， allowing Shandong and Jiangsu Provinces to join the ranks of Shanghai， Zhejiang， Guangdong and Shenzhen which have the permission of issuing governmental bonds.
This is for the sake of improving the structural transparency of local governmental debts， which is considered to be a problem as serious as the amount of debts.
A professor from Tsinghua University said that this might find a direction for the reform to local governmental debts.
“The audit ould get to know the source of local governmental debts. The new file would put forward a better way to the governments to raise investment，” the professor said. “A transparent system of local debts is as important as the solution to the debt problem， since it could prevent the case of Detroit from happening in China forever.”